The cabinet of Prime Minister Ahmed Nazif, which will mark its fifth anniversary in office on July 14, 2009, has revitalized Egypt’s sluggish economic reform process, exchanged external finance for internal revenue, and eased restrictions on trade. Yet Nazif’s policies have exacerbated social inequalities and tied some reform progress to U.S. economic aid, which now faces steep cuts. The global economic crisis has further increased resistance to reform and encouraged the government to engage in palliative spending at the expense of development. Under these conditions, the sustainability of Egypt’s reform process is in doubt.
Egyptians have justifiably criticized successive governments for economic mismanagement and dependence on superpower patronage. Nazif’s cabinet, however, initially provided much cause for critics to eat their words by streamlining regulations, reducing non-tariff barriers to trade, implementing tax reforms, and deepening the financial sector. In 2007, Egypt garnered 7 percent GDP growth and became the World Bank’s top economic reformer. In the context of the global economic crisis, the Egyptian government has avoided risky levels of countercyclical spending and introduced a modest $5.4 billion fiscal stimulus package (much of which is to be invested in physical infrastructure). Inflation has fallen, and the economy achieved a 4.3 percent growth rate in the third quarter of FY 2008–2009, respectable in view of the global crisis. Egyptian officials have also reaffirmed their commitment to future reforms including a value-added tax, streamlined subsidies, and a second round of privatization. A powerful business faction allied with Gamal Mubarak, the president’s son and head of the ruling National Democratic Party’s Policies Secretariat, supports Nazif’s reforms.
At the same time, arrangements between corporatized labor and the Mubarak regime, as well as the ripple effects of the global financial crisis, limit the scope of reform. As of 2008, the government had privatized only 20 percent of the public sector, and the cancellation of bids for Banque du Caire in July 2008 suggests that further privatization will not be forthcoming. Between July 2008 and April 2009, subsidies increased by 31.5 percent and public sector salaries by 19.7 percent. In May, President Mubarak ordered Nazif to double the “social allowance,” a tax-free bonus that supplements public sector wages, to 10 percent of the base wage. The FY 2009–2010 government budget is not expansionary, but growing welfare transfers may cut into promised investment in physical infrastructure.
Labor unrest and clashes with the security services in 2008–2009 show the tenuousness of the reform project. During the past year protests have assumed a new dimension, as strikers demand the formation of independent unions (as opposed to the government-affiliated unions that dominate the system) and security forces employ increasingly violent tactics. Privatized companies have been steadily eliminating excess labor, while inflation and a large pool of beneficiaries have caused government salaries to lose real value. During the past five years, more than 1.5 million workers in the civil service, state-owned enterprises, and privatized companies have gone on strike for higher wages and bonuses. The pain of reform has been magnified by the global economic crisis, which left the country’s conservative financial sector unscathed but has delivered a major blow to tourism, real estate, and manufactured exports. These industries have extensive linkages to other parts of the Egyptian economy, particularly through the small business and informal sectors that employ much of the population.
In this challenging environment, reforms that have succeeded owe much to innovations in foreign assistance that have helped reformers overcome political opposition and the low technical capacity of the bloated civil service. In addition to employing donor benchmarks as political coverage for unpopular reforms in the People’s Assembly, reformist ministers have drawn on U.S. Agency for International Development (USAID) and UN Development Program funds to construct highly specialized technical units within major economic ministries, agencies, and boards. Technical units employ qualified Egyptian staff at market-competitive salaries and are free from government audit and parliamentary scrutiny during the regular budgeting process, two formal conduits by which labor is able to challenge economic reforms. The units engendered opposition from regular civil servants and rendered the institutional framework of the Egyptian economy akin to a seagull dragging the body of a beached whale, yet their technical expertise and insulation from political pressure has made them important to the reform agenda.
But recent changes in U.S. aid policy toward Egypt threaten to deprive Nazif and other reformers of the help that reform benchmarks and technical units have provided. In FY 2009, the United States cut economic assistance to Egypt from $415 million to $200 million, and in September 2009 USAID will terminate support to technical units. Those ministries wishing to retain experts must either self-finance or compete for counterpart currencies that are generated from other USAID programs and allocated by the Ministry of International Cooperation. In late 2007, the U.S. administration eliminated or scaled back most substantive reform benchmarks from Egypt’s cash transfer. Meanwhile, U.S. military assistance remains a $1.3 billion annual commitment, and Congress is adding $260 million in military aid and $50 million to support security arrangements on the border with Gaza.
The U.S. administration and many Egyptian elites view military aid as critical, but few in Washington seem to have noticed the importance of economic aid and engagement to Egypt’s small faction of reformers. In the past, Nazif and his cohort were able to manage labor opposition throughout periods of economic growth and abundant U.S. economic assistance. Today Egypt’s reformers face heightened opposition, economic crisis, and aid reductions, challenges that are evident in the awakening of the shop floor and the growing largesse in the FY 2009–2010 budget. Now, more than any other time during Nazif’s tenure, opposing forces in Egypt may be able to stall, halt, or even reverse the economic reform process.
Anne Mariel Peters is assistant professor of government at Wesleyan University in Connecticut and spent one year in Egypt as a Fulbright scholar.
